Every year, something happens in the money market in March: System liquidity tightens. This happens due to: (a)Advance tax outflows of March 15 lead to money flowing out of the banking system into the government’s account with RBI, (b) higher demand for cash from corporates due to year-end balance sheet reasons and (c) money market instruments like bank certificate of deposit (CDs) issued earlier maturing in March and banks issuing fresh CDs leading to demand for money.
In the money market, which is the market for very short maturity instruments, interest rates move up due to higher demand for money. The peaking of interest rates happen typically around the third week of March, since corporates and banks do not wait for the last moment to manage their balance sheets. System liquidity eases in April, as money flows back from the government’s account with RBI in the form of government expenditure and demand from corporates and banks is not as much. Interest rates on these ease gradually as we move from March to April.
